Domtar announces second quarter 2006 financial results

Share Name	Share Symbol	Market	Type
Defence Therapeutics Inc	TG:DTC	Tradegate	Ordinary Share

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	-0.01	-1.89%	0.518	0.50	0.536	0.548	0.486	0.548	27,920	22:50:01

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TICKER SYMBOL: DTC (TSX, NYSE) MONTREAL, Aug. 1 /PRNewswire-FirstCall/ -- Domtar Inc. announced today a loss from continuing operations of $3 million ($0.01 per common share) in the second quarter of 2006 compared to a loss from continuing operations of $22 million ($0.10 per common share) in the first quarter of 2006 and earnings from continuing operations of $6 million ($0.02 per common share) in the second quarter of 2005. SUMMARY OF RESULTS Q2 2006 Q1 2006 Q2 2005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (In millions of Canadian dollars, unless otherwise noted) Sales 1,159 1,191 1,267 Operating profit (loss) from continuing operations(1) 26 (6) 37 Earnings (loss) from continuing operations (3) (22) 6 Net earnings (loss) (9) (24) 2 Earnings (loss) from continuing operations per common share (in dollars) (0.01) (0.10) 0.02 Net earnings (loss) per common share (in dollars) (0.04) (0.10) 0.01 Excluding specified items(1) Operating profit (loss) from continuing operations 44 (15) 39 Earnings (loss) from continuing operations 3 (30) 7 Earnings (loss) from continuing operations per common share (in dollars) 0.01 (0.13) 0.03 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Operating profit from continuing operations is a non-GAAP measure. For a discussion on specified items and the use of non-GAAP measures, see "Notes to the summary of results" in the appendix. "Overall, our operations continued to benefit from price increases covering most of our products, as well as continued strength in all of our different market segments except for lumber. While our costs continue to be impacted by the strong Canadian dollar that reached its highest level since the 1970s, today's improved results from the first quarter also illustrate our employees' efforts and focus on executing the restructuring plan announced in November 2005. The closure of our Vancouver mill in June was a major step in a series of measures aimed at improving the Company's profitability and cash flow generation." "With regard to the softwood lumber dispute, Domtar remains critical of the proposed framework agreement, considering Canada's many key legal victories. The settlement would deprive our shareholders of 20% of the duties collected so far by the U.S. Goverment, with no guarantee of a long-standing trade peace," said Raymond Royer, Domtar's President and Chief Executive Officer. OPERATIONAL REVIEW SECOND QUARTER 2006 COMPARED TO FIRST QUARTER 2006 ---------- In acordance with Canadian generally accepted accounting principles, effective in the second quarter of 2006, the information pertaining to our Vancouver paper mill will no longer be included in our Paper business but presented as a discontinued operation and assets held for sale. Subsequent to quarter-end, we reached an agreement to sell our Vancouver paper mill property, subject to a number of closing conditions. PAPERS Q2 2006 Q1 2006 Variance ------------------------------------------------------------------------- ------------------------------------------------------------------------- (In millions of Canadian dollars) Operating profit (loss) from continuing operations 17 (18) 35 Operating profit (loss) from continuing operations, excluding specified items 36 (22) 58 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The $58 million increase in operating profit from continuing operations excluding specified items in the Papers segment was mainly the result of higher average selling prices for pulp and paper as well as the benefit pursuant to the closures of the Cornwall and Ottawa paper mills which were effective at the end of the first quarter. These factors were partially offset by lower shipments for paper as well as the negative impact of a stronger Canadian dollar. PAPER MERCHANTS Q2 2006 Q1 2006 Variance ------------------------------------------------------------------------- ------------------------------------------------------------------------- (In millions of Canadian dollars) Operating profit from continuing operations 3 4 (1) Operating profit from continuing operations, excluding specified items 3 4 (1) ------------------------------------------------------------------------- ------------------------------------------------------------------------- The $1 million decrease in operating profit from continuing operations excluding specified items in the Paper Merchants segment was primarily due to lower margins offset by operating cost reductions. WOOD Q2 2006 Q1 2006 Variance ------------------------------------------------------------------------- ------------------------------------------------------------------------- (In millions of Canadian dollars) Operating loss from continuing operations (10) (5) (5) Operating loss from continuing operations, excluding specified items (9) (6) (3) ------------------------------------------------------------------------- ------------------------------------------------------------------------- The $3 million increase in operating loss from continuing operations excluding specified items in the Wood segment was mainly attributable to lower average selling prices and the negative impact of a stronger Canadian dollar. These factors were partially mitigated by the Ontario government's one-time retroactive reduction in Crown stumpage fees related to 2005 and 2006. The previously announced closures of the Malartic and Grand-Remous sawmills became effective in the second quarter of 2006. PACKAGING Q2 2006 Q1 2006 Variance ------------------------------------------------------------------------- ------------------------------------------------------------------------- (In millions of Canadian dollars) Operating profit from continuing operations 16 11 5 Operating profit from continuing operations, excluding specified items 14 7 7 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The $7 million increase in operating profit from continuing operations excluding specified items in the Packaging segment (our 50% share of Norampac Inc.) was mainly attributable to higher average selling prices for both containerboard and corrugated containers, higher shipments of corrugated containers and lower costs for purchased recycled fiber and energy, partially offset by the negative impact of a stronger Canadian dollar and lower containerboard shipments. LIQUIDITY AND CAPITAL ---------- FREE CASH FLOW(1) Q2 2006 Q1 2006 Q2 2005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (In millions of Canadian dollars) Cash flows provided from operating activities of continuing operations before changes in working capital and other items 79 28 93 Changes in working capital and other items (21) (42) (44) ------------------------------------------------------------------------- Cash flows provided from (used for) operating activities of continuing operations 58 (14) 49 Net additions to property, plant and equipment (33) (24) (37) ------------------------------------------------------------------------- Free cash flow 25 (38) 12 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Free cash flow amounted to $25 million in the second quarter of 2006 including $21 million of cash requirements for working capital. Domtar's net debt-to-total capitalization ratio(1) as at June 30, 2006 stood at 57.9% compared to 57.7% as at December 31, 2005. Domtar's net indebtedness decreased by $53 million, largely due to the positive impact of a stronger Canadian dollar (based on month-end exchange rates) on our U.S. dollar denominated debt. (1) For a discussion on the use of non-GAAP measures, see "Notes to the summary of results" in the appendix. OUTLOOK ---------- The Papers segment continues to enjoy improved market conditions in our core uncoated freesheet markets. While we remain concerned by the potentially negative consequences of the softwood lumber negotiations, we expect a favorable pulp, paper, and containerboard market environment for the remainder of 2006, and we are determined to achieve the full potential of our restructuring plan. FORWARD-LOOKING STATEMENTS ---------- This press release may contain forward-looking statements relating to trends in, or representing management's beliefs about, Domtar's future growth, results of operations, performance and business prospects and opportunities. These forward-looking statements are generally denoted by the use of words such as "anticipate", "believe", "expect", "intend", "aim", "target", "plan", "continue", "estimate", "may", "will", "should" and similar expressions. These statements reflect management's current beliefs and are based on information currently available to management. Forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by management, are inherently subject to known and unknown risks and uncertainties such as, but not limited to, general economic and business conditions, product selling prices, raw material and operating costs, changes in foreign currency exchange rates, the ability to integrate acquired businesses into existing operations, the ability to realize anticipated cost savings, the performance of manufacturing operations and other factors referenced herein and in Domtar's continuous disclosure filings. These factors should be considered carefully and undue reliance should not be placed on the forward-looking statements. Although the forward-looking statements are based upon what management believes to be reasonable estimates and assumptions, Domtar cannot ensure that actual results will not be materially different from those expressed or implied by these forward-looking statements. Unless specifically required by law, Domtar assumes no obligation to update or revise these forward-looking statements to reflect new events or circumstances. These risks, uncertainties and other factors include, among other things, those discussed under "Risk Factors" in Domtar's Management's Discussion and Analysis (MD&A). SECOND QUARTER 2006 RESULTS WEBCAST ---------- You are invited to listen to a live broadcast of the conference call with financial analysts that the Company will be holding today to present its second quarter 2006 financial results. It will take place at 4:00 p.m. (EDT) on the Domtar corporate website at: http://www.domtar.com/. DOMTAR IS THE THIRD LARGEST PRODUCER OF UNCOATED FREESHEET PAPER IN NORTH AMERICA. IT IS ALSO A LEADING MANUFACTURER OF BUSINESS PAPERS, COMMERCIAL PRINTING AND PUBLICATION PAPERS, AND TECHNICAL AND SPECIALTY PAPERS. DOMTAR MANAGES ACCORDING TO INTERNATIONALLY RECOGNIZED STANDARDS 17 MILLION ACRES OF FORESTLAND IN CANADA AND THE UNITED STATES, AND PRODUCES LUMBER AND OTHER WOOD PRODUCTS. DOMTAR HAS APPROXIMATELY 9,000 EMPLOYEES ACROSS NORTH AMERICA. THE COMPANY ALSO HAS A 50% INVESTMENT INTEREST IN NORAMPAC INC., THE LARGEST CANADIAN PRODUCER OF CONTAINERBOARD. APPENDIX -------- NOTES TO THE SUMMARY OF RESULTS NOTE 1. ------- SPECIFIED ITEMS --------------- In Domtar's view, specified items are items that do not typify normal operating activities. The following table reconciles operating profit (loss) from continuing operations, earnings (loss) from continuing operations, earnings (loss) from continuing operations per share, determined in accordance with GAAP*, to operating profit (loss) from continuing operations, earnings (loss) from continuing operations, earnings (loss) from continuing operations per share, excluding specified items. Q2 2006 Q2 2006 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (In millions of Canadian dollars, unless otherwise noted) Earnings (loss) Loss from Opera- from Operating Earnings conti- ting conti- profit (loss) nuing loss Loss nuing from from opera- from from opera- conti- conti- tions conti- conti- tions nuing nuing per share nuing nuing per share opera- opera- (in dol- opera- operat- (in dol- tions tions lars) tions ions lars) As per GAAP* 26 (3) (0.01) (6) (22) (0.10) Specified items: Gains on sales of property, plant and equipment (a) - - - - Closure and restructuring costs (b) 19 13 3 2 Legal settle- ments (c) - - (7) (7) Unrealized mark-to-market (gains) losses (d) (1) (1) (5) (3) Income tax legislation modification (e) - (4) - - Foreign exchange (gains) losses on long- term debt (f) - (2) - - Insurance recoveries (g) - - - - -------------------------- -------------------------- 18 6 0.02 (9) (8) (0.03) Excluding -------------------------- -------------------------- specified items 44 3 0.01 (15) (30) (0.13) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Q2 2005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Earnings from Operat- conti- ing nuing from from opera- conti- conti- tions nuing nuing per share opera- opera- (in dol- tions tions lars) As per GAAP* 37 6 0.02 Specified items: Gains on sales of property, plant and equipment (a) (4) (3) Closure and restructuring costs (b) 10 6 Legal settlements (c) - 1 Unrealized mark-to-market (gains) losses (d) (1) (1) Income tax legislation modification (e) - - Foreign exchange (gains)losses on long- term debt (f) - - Insurance recoveries (g) (3) (2) ------------------------------------------------------------------------- 2 1 0.01 ------------------------------------------------------------------------- Excluding specified items 39 7 0.03 ------------------------------------------------------------------------- ------------------------------------------------------------------------- * Except for operating profit (loss) from continuing operations which is a non-GAAP measure. See note 2. a) Sales of property, plant and equipment Domtar's results include gains or losses on sales of property, plant and equipment. These gains or losses are presented under "Selling, general and administrative" expenses in the financial statements. b) Closure and restructuring costs Domtar's results include closure and restructuring charges. These charges are presented under "Closure and restructuring costs" in the financial statements. c) Legal settlements Domtar's results include charges or revenues related to legal settlements. These charges or revenues are presented under "Selling, general and administrative" expenses in the financial statements. d) Unrealized mark-to-market gains or losses Domtar's results include unrealized mark-to-market gains or losses on commodity swap contracts and foreign exchange contracts not considered as hedges for accounting purposes. Such gains or losses are presented under "Selling, general and administrative" expenses in the financial statements. e) Income tax legislation modification Domtar's results include charges related to modifications to the income tax legislation. These charges are presented under "Income tax recovery" in the financial statements. f) Foreign exchange impact on long-term debt Domtar's results include foreign exchange gains or losses on the translation of a portion of its long-term debt. Such gains or losses are presented under "Financing expenses" in the financial statements. g) Insurance recoveries Domtar's results include insurance recoveries. These insurance recoveries are presented under "Selling, general and administrative" expenses in the financial statements. NOTE 2. -------- USE OF NON-GAAP MEASURES Except where otherwise indicated, all financial information reflected herein is determined on the basis of Canadian GAAP. Operating profit (loss) from continuing operations is a non-GAAP measure that is calculated within Domtar's financial statements. Domtar focuses on operating profit (loss) from continuing operations as this measure enables it to compare its results between periods without regard to debt service or income taxes. Operating profit (loss) from continuing operations excluding specified items, earnings (loss) from continuing operations excluding specified items, earnings (loss) from continuing operations per common share excluding specified items are non-GAAP measures. Measures excluding specified items are used in evaluating the Company's performance between periods without regard to specified items that adversely or positively affected its GAAP measures. Free cash flow is a non-GAAP measure that is defined as the amount by which cash flows provided from continuing operating activities, as determined in accordance with GAAP, exceed net additions to property, plant and equipment, as determined in accordance with GAAP. Free cash flow is used in evaluating the Company's ability to service its debt and pay dividends to its shareholders. Net debt-to-total capitalization ratio is a non-GAAP measure that is calculated as long-term debt and bank indebtedness, net of cash and cash equivalents, to the sum of net debt and shareholders' equity. Domtar's management tracks this ratio on a regular basis in order to assess its debt position. The above non-GAAP measures have no standardized meaning prescribed by GAAP and are not necessarily comparable to similar measures presented by other companies, and therefore should not be considered in isolation. Domtar believes that it would be useful for investors and other users to be aware of these measures so they can better assess the Company's performance. Consolidated Financial Statements CONSOLIDATED Three months ended June 30 Six months ended June 30 EARNINGS 2006 2006 2005 2006 2006 2005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (In millions of Canadian dollars, unless otherwise noted) -------(Unaudited)------ -------(Unaudited)------- US$ $ $ US$ $ $ (NOTE 2) (NOTE 2) Sales 1,039 1,159 1,267 2,108 2,350 2,503 Operating expenses Cost of sales 879 980 1,068 1,824 2,034 2,115 Selling, general and adminis- trative 50 56 60 104 116 117 Amorti- zation 70 78 92 142 158 180 Closure and restructuring costs (NOTE 3) 17 19 10 20 22 16 -------------------------- -------------------------- 1,016 1,133 1,230 2,090 2,330 2,428 -------------------------- -------------------------- Operating profit from continuing operations 23 26 37 18 20 75 Financing expenses 37 41 39 72 80 73 Amortization of deferred gain (2) (2) (1) (3) (3) (2) -------------------------- -------------------------- Earnings (loss) from continuing operations before income taxes (12) (13) (1) (51) (57) 4 Income tax recovery (9) (10) (7) (29) (32) (15) -------------------------- -------------------------- Earnings (loss) from continuing operations (3) (3) 6 (22) (25) 19 Loss from discontinued operations (NOTE 4) (5) (6) (4) (7) (8) (7) -------------------------- -------------------------- Net earnings (loss) (8) (9) 2 (29) (33) 12 -------------------------- -------------------------- -------------------------- -------------------------- Per common share (in dollars) (NOTE 5) Earnings (loss) from continuing operations Basic (0.01) (0.01) 0.02 (0.10) (0.11) 0.08 Diluted (0.01) (0.01) 0.02 (0.10) (0.11) 0.08 Net earnings (loss) Basic (0.04) (0.04) 0.01 (0.13) (0.15) 0.05 Diluted (0.04) (0.04) 0.01 (0.13) (0.15) 0.05 Weighted average number of common shares outstanding (millions) Basic 230.4 230.4 229.6 230.3 230.3 229.5 Diluted 230.4 230.4 230.7 230.3 230.3 230.6 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED RETAINED Three months ended June 30 Six months ended June 30 EARNINGS 2006 2006 2005 2006 2006 2005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (In millions of Canadian dollars, unless otherwise noted) -------(Unaudited)------ -------(Unaudited)------- US$ $ $ US$ $ $ (NOTE 2) (NOTE 2) Retained earnings (deficit) at beginning of period (39) (43) 408 (18) (19) 412 Net earnings (loss) (8) (9) 2 (29) (33) 12 Dividends on common shares - - (14) - - (28) Dividends on preferred shares (1) (1) (1) (1) (1) (1) -------------------------- -------------------------- Retained earnings (deficit) at end of period (48) (53) 395 (48) (53) 395 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes are an integral part of the consildated financial statements. CONSOLIDATED BALANCE SHEETS As at June June December 30 30 31 2006 2006 2005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (In millions of Canadian dollars, unless otherwise noted) -------------(Unaudited)-------- US$ $ $ (NOTE 2) Assets Current assets Cash and cash equivalents 84 94 83 Receivables 253 282 294 Inventories 561 626 715 Prepaid expenses 20 22 11 Income and other taxes receivable 14 15 16 Future income taxes 31 35 38 --------------------------------- 963 1,074 1,157 Property, plant and equipment 3,073 3,426 3,634 Assets held for sale (NOTE 4) 21 24 - Goodwill 82 91 92 Other assets 276 308 309 --------------------------------- 4,415 4,923 5,192 --------------------------------- --------------------------------- Liabilities and shareholders' equity Current liabilities Bank indebtedness 55 62 21 Trade and other payables 481 536 651 Income and other taxes payable 29 32 29 Long-term debt due within one year 2 2 2 --------------------------------- 567 632 703 Long-term debt 1,950 2,174 2,257 Future income taxes 221 247 292 Other liabilities and deferred credits 282 314 331 Shareholders' equity Preferred shares 30 34 36 Common shares 1,602 1,786 1,783 Contributed surplus 13 14 14 Deficit (48) (53) (19) Accumulated foreign currency translation adjustments (NOTE 7) (202) (225) (205) --------------------------------- 1,395 1,556 1,609 --------------------------------- 4,415 4,923 5,192 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. CONSOLIDATED CASH FLOWS Three months ended June 30 Six months ended June 30 2006 2006 2005 2006 2006 2005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (In millions of Canadian dollars, unless otherwise noted) ------(Unaudited)-------- -----(Unaudited)------- US$ $ $ US$ $ $ (NOTE 2) (NOTE 2) Operating activities Earnings (loss) from continuing operations (3) (3) 6 (22) (25) 19 Non-cash items: Amortization and write-down of property, plant and equipment 70 78 94 142 158 182 Future income taxes (10) (12) (11) (34) (38) (23) Amortization of deferred gain (2) (2) (1) (3) (3) (2) Closure and restructuring costs, excluding write-down of property, plant and equipment (NOTE 3) 17 19 8 20 22 14 Other (1) (1) (3) (7) (7) (7) ------------------------- ----------------------- 71 79 93 96 107 183 ------------------------- ----------------------- Changes in working capital and other items Receivables (2) (2) 12 (4) (4) (29) Inventories 42 47 9 56 62 (58) Prepaid expenses 3 3 (1) (7) (8) (9) Trade and other payables (23) (26) (44) (51) (57) (17) Income and other taxes (1) (1) - 4 4 (1) Other - - (7) (5) (5) (17) Payments of closure and restructuring costs (38) (42) (13) (49) (55) (27) ------------------------- ----------------------- (19) (21) (44) (56) (63) (158) ------------------------- ----------------------- Cash flows provided from operating activities of continuing operations 52 58 49 40 44 25 ------------------------- ----------------------- Cash flows used for operating activities of discontinued operations (NOTE 4) (6) (7) (11) (7) (8) (21) ------------------------- ----------------------- Cash flows provided from operating activities 46 51 38 33 36 4 ------------------------- ----------------------- Investing activities Additions to property, plant and equipment (31) (34) (46) (53) (59) (79) Proceeds from disposals of property, plant and equipment 1 1 9 2 2 14 Other - - 1 (3) (3) (3) ------------------------- ----------------------- Cash flows used for investing activities of continuing operations (30) (33) (36) (54) (60) (68) ------------------------- ----------------------- Cash flows used for investing activities of discontinued operations (NOTE 4) - - (1) - - (1) ------------------------- ----------------------- Cash flows used for investing activities (30) (33) (37) (54) (60) (69) ------------------------- ----------------------- Financing activities Dividend payments (1) (1) (14) (1) (1) (28) Change in bank indebtedness 25 28 17 36 40 8 Change in revolving bank credit, net of expenses (41) (46) 21 (1) (1) 190 Repayment of long- term debt (1) (1) (1) (1) (1) (90) Common shares issued, net of expenses 1 1 1 2 2 4 Redemptions of preferred shares - - (1) (1) (1) (2) ------------------------- ----------------------- Cash flows provided from (used for) financing activities of continuing operations (17) (19) 23 34 38 82 ------------------------- ----------------------- Cash flows provided from financing activities of discontinued operations (NOTE 4) - - - - - - ------------------------- ----------------------- Cash flows provided from (used for) financing activities (17) (19) 23 34 38 82 ------------------------- ----------------------- Net increase (decrease) in cash and cash equivalents (1) (1) 24 13 14 17 Translation adjustments related to cash and cash equivalents (3) (3) - (3) (3) 1 Cash and cash equivalents at beginning of period 88 98 46 74 83 52 ------------------------- ----------------------- Cash and cash equivalents at end of period 84 94 70 84 94 70 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash and cash equivalents at end of period, related to: Continuing operations 84 94 70 84 94 70 Discontinued operations - - - - - - ------------------------------------------------------------------------- Cash and cash equivalents at end of period 84 94 70 84 94 70 ------------------------- ----------------------- ------------------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SECOND QUARTER 2006 (IN MILLIONS OF CANADIAN DOLLARS, UNLESS OTHERWISE NOTED) NOTE I. --------------------- BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited interim consolidated financial statements, prepared in accordance with Canadian generally accepted accounting principles, contain all adjustments necessary to present fairly Domtar Inc.'s (Domtar) financial position as at June 30, 2006 and December 31, 2005, as well as its results of operations and its cash flows for the three months and six months ended June 30, 2006 and 2005. While management believes that the disclosures presented are adequate, these unaudited interim consolidated financial statements and notes should be read in conjunction with Domtar's annual consolidated financial statements. These unaudited interim consolidated financial statements follow the same accounting policies as the most recent annual consolidated financial statements. NOTE 2. --------------------- UNITED STATES DOLLAR AMOUNTS The unaudited interim consolidated financial statements are expressed in Canadian dollars and, solely for the convenience of the reader, the 2006 unaudited interim consolidated financial statements and the tables of certain related notes have been translated into U.S. dollars at the June 2006 month-end rate of CAN$1.00 = US$0.8969. This translation should not be construed as an application of the recommendations relating to the accounting for foreign currency translation, but rather as supplemental information for the reader. NOTE 3. --------------------- CLOSURE AND RESTRUCTURING COSTS In 2005, Domtar's management announced a series of targeted measures aimed at returning the Corporation to profitability. The plan included closures of the Cornwall and Ottawa, Ontario paper mills, the Grand-Remous and Malartic, Quebec sawmills, the sale of the Vancouver, British Columbia paper mill and cost-cutting initiatives. This workforce reduction and restructuring plan is in addition to the plans announced in 2004, which covered the Corporation's paper and merchant operations in Canada and the United States. As at June 30, 2006, the balance of the provision was $50 million, which includes $42 million related to the Papers segment and $8 million related to the Wood segment. For the three months and six months ended June 30, 2006, the Papers segment incurred severance payments of $29 million and $39 million, respectively, a reversal of the provision of nil and $1 million, respectively, labor costs of $1 million and $3 million, respectively, and $3 million of other additions during the second quarter of 2006 were incurred, included in the table below. In addition, for the three months and six months ended June 30, 2006, the Papers segment incurred write-downs of $1 million of certain inventory items and spare parts to their net recoverable amounts, asset retirement obligations of $1 million and other closure related costs of $12 million and $13 million, respectively, and the Wood segment incurred other closure related costs of $1 million during the second quarter of 2006. In 2005, Norampac's management decided to permanently shut down one paper machine at its Red Rock, Ontario containerboard plant and also decided to close three corrugated products plants located in Concord, Ontario, Montreal, Quebec and Buffalo, New York. As at June 30, 2006, the balance of the provision was nil, representing the Corporation's proportionate share. For the three months and six months ended June 30, 2006, severance payments of nil and $2 million, respectively, and labor costs of nil and $1 million, respectively, were incurred, included in the table below. The following table provides a reconciliation of all closure and restructuring cost provisions: June June December 30 30 31 2006 2006 2005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- --------(Unaudited)-------- US$ $ $ (NOTE 2) Balance at beginning of period 76 85 37 Severance payments (37) (41) (32) Reversal of provision (1) (1) (1) Additions Labor costs 4 4 71 Environmental costs - - 10 Other 3 3 - --------------------------- Balance at end of period 45 50 85 ------------------------------------------------------------------------- ------------------------------------------------------------------------- NOTE 4. --------------------- DISCONTINUED OPERATIONS In November 2005, as part of its restructuring program, Domtar announced its intention to sell the Vancouver, British Columbia paper mill. Effective in the second quarter of 2006, the Vancouver paper mill was not sold and has been permanently closed. Considering the fact that its major product line will not continue to be sold, the Vancouver paper mill will no longer be included in the Papers segment but classified as a discontinued operation in the consolidated earnings and in the consolidated cash flows and the property, plant and equipment as held for sale in the consolidated balance sheets. The consolidated earnings and cash flows for the three months and six months ended June 30, 2005 have been restated for purposes of comparability with the basis of presentation adopted in the current period. Domtar expects to complete a sale transaction within the next year. The loss from discontinued operations of the Vancouver paper mill is summarized as follows: Three months ended June 30 Six months ended June 30 2006 2006 2005 2006 2006 2005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- -------(Unaudited)------- -------(Unaudited)------- US$ $ $ US$ $ $ (NOTE 2) (NOTE 2) Sales 14 16 20 32 36 43 ------------------------- ------------------------- Loss from discontinued operations before income taxes (8) (9) (6) (11) (12) (10) Income tax recovery (3) (3) (2) (4) (4) (3) ------------------------- ------------------------- Loss from discontinued operations (5) (6) (4) (7) (8) (7) Basic loss from discontinued operations per share (in dollars) (0.03) (0.03) (0.01) (0.03) (0.04) (0.03) Diluted loss from discontinued operations per share (in dollars) (0.03) (0.03) (0.01) (0.03) (0.04) (0.03) ------------------------------------------------------------------------- ------------------------------------------------------------------------- NOTE 5. --------------------- EARNINGS (LOSS) PER SHARE The following table provides the reconciliation between basic and diluted earnings (loss) per share: Three months ended June 30 Six months ended June 30 2006 2006 2005 2006 2006 2005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- -------(Unaudited)------- -------(Unaudited)------- US$ $ $ US$ $ $ (NOTE 2) (NOTE 2) Earnings (loss) from continuing operations (3) (3) 6 (22) (25) 19 Dividend requirements of preferred shares 1 1 1 1 1 1 ------------------------- ------------------------- Earnings (loss) from continuing operations applicable to common shares (4) (4) 5 (23) (26) 18 Net earnings (loss) (8) (9) 2 (29) (33) 12 Dividend requirements of preferred shares 1 1 1 1 1 1 ------------------------- ------------------------- Net earnings (loss) applicable to common shares (9) (10) 1 (30) (34) 11 Weighted average number of common shares outstanding (millions) 230.4 230.4 229.6 230.3 230.3 229.5 Effect of dilutive stock options (millions) - - 1.1 - - 1.1 ------------------------- ------------------------- Weighted average number of diluted common shares outstanding (millions) 230.4 230.4 230.7 230.3 230.3 230.6 ------------------------- ------------------------- Basic earnings (loss) from continuing operations per share (in dollars) (0.01) (0.01) 0.02 (0.10) (0.11) 0.08 Diluted earnings (loss) from continuing operations per share (in dollars) (0.01) (0.01) 0.02 (0.10) (0.11) 0.08 Basic net earnings (loss) per share (in dollars) (0.04) (0.04) 0.01 (0.13) (0.15) 0.05 Diluted net earnings (loss) per share (in dollars) (0.04) (0.04) 0.01 (0.13) (0.15) 0.05 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The following table provides the securities that could potentially dilute basic earnings (loss) per share in the future but were not included in the computation of diluted earnings (loss) per share because to do so would have been anti-dilutive for the periods presented: June 30 June 30 2006 2005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Number of shares Options 4,872,495 4,890,136 Bonus shares 67,875 - Rights 84,500 84,500 ------------------------------------------------------------------------- ------------------------------------------------------------------------- NOTE 6. --------------------- RECEIVABLES As at February 22, 2006, Domtar finalized a new three-year securitization agreement, which includes both U.S. and Canadian receivables. The maximum cash consideration that can be received from the sale of receivables under this new combined agreement is $222 million (US$190 million). As at June 30, 2006, the senior beneficial interest held by third parties amounted to $193 million (US$173 million) under this new securitization program compared to $163 million (US$140 million) as at December 31, 2005 under the old U.S. and Canadian accounts receivable programs. NOTE 7. --------------------- ACCUMULATED FOREIGN CURRENCY TRANSLATION ADJUSTMENTS June June December 30 30 31 2006 2006 2005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- -------(Unaudited)------- US$ $ $ (NOTE 2) Balance at beginning of period (184) (205) (190) Effect of changes in exchange rates during the period: On net investment in self-sustaining foreign subsidiaries (76) (85) (69) On certain long-term debt denominated in foreign currencies designated as a hedge of net investment in self-sustaining foreign subsidiaries 71 79 65 Future income taxes thereon (13) (14) (11) ------------------------- Balance at end of period (202) (225) (205) ------------------------------------------------------------------------- ------------------------------------------------------------------------- NOTE 8. --------------------- FINANCIAL INSTRUMENTS FOREIGN CURRENCY RISK In order to reduce the potential negative effects of a fluctuating Canadian dollar, Domtar has entered into various arrangements to stabilize anticipated future net cash inflows denominated in U.S. dollars. The following table provides the detail of the arrangements used as hedging instruments: June December June December 30 31 30 31 2006 2005 2006 2005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------(Unaudited)------------- Average exchange rate Contractual amounts (CAN$/US$) (In millions of U.S. dollars) Forward foreign exchange contracts 0 to 12 months 1.20 1.24 300 295 13 to 24 months 1.13 - 3 - Currency options purchased 0 to 12 months 1.15 - 120 - 13 to 24 months 1.15 - 20 - Currency options sold 0 to 12 months 1.22 - 20 - 13 to 24 months 1.22 - 20 - ------------------------------------------------------------------------- ------------------------------------------------------------------------- Forward foreign exchange contracts are contracts whereby Domtar has the obligation to sell U.S. dollars at a specific rate. Currency options purchased are contracts whereby Domtar has the right, but not the obligation, to sell U.S. dollars at the strike rate if the U.S. dollar trades below that rate. Currency options sold are contracts whereby Domtar has the obligation to sell U.S. dollars at the strike rate if the U.S. dollar trades above that rate. NOTE 9. --------------------- DEFINED BENEFIT PLANS AND OTHER EMPLOYEE FUTURE BENEFIT PLANS Three months ended June 30 Six months ended June 30 2006 2006 2005 2006 2006 2005 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ---------(Unaudited)--------- ---------(Unaudited)-------- US$ $ $ US$ $ $ (NOTE 2) (NOTE 2) Net periodic benefit cost for defined benefit plans 13 14 11 26 29 20 Net periodic benefit cost for other employee future benefit plans 3 3 3 4 5 6 ------------------------------------------------------------------------- ------------------------------------------------------------------------- NOTE 10. --------------------- SEGMENTED DISCLOSURES Domtar operates in the four reportable segments described below. Each reportable segment offers different products and services and requires different technology and marketing strategies. The following summary briefly describes the operations included in each of Domtar's reportable segments: - PAPERS - represents the aggregation of the manufacturing and distribution of business, commercial printing and publication, and technical and specialty papers, as well as pulp. - PAPER MERCHANTS - involves the purchasing, warehousing, sale and distribution of various products made by Domtar and by other manufacturers. These products include business and printing papers, graphic arts supplies and certain industrial products. - WOOD - comprises the manufacturing and marketing of lumber and wood- based value-added products and the management of forest resources. - PACKAGING - comprises the Corporation's 50% ownership interest in Norampac, a company that manufactures and distributes containerboard and corrugated products. Domtar evaluates performance based on operating profit, which represents sales, reflecting transfer prices between segments at fair value, less allocable expenses before financing expenses and income taxes. SEGMENTED DATA OF CONTINUING OPERATIONS Three months ended June 30 Six months ended June 30 2006 2006 2005 2006 2006 2005 ---------(Unaudited)--------- ---------(Unaudited)-------- US$ $ $ US$ $ $ (NOTE 2) (NOTE 2) Sales Papers 621 693 743 1,260 1,405 1,482 Paper Merchants 230 256 260 478 533 519 Wood 117 130 201 249 278 386 Packaging 145 162 170 283 315 330 ----------------------------- ---------------------------- Total for reportable segments 1,113 1,241 1,374 2,270 2,531 2,717 Intersegment sales - Papers (61) (68) (68) (135) (151) (139) Intersegment sales - Wood (12) (13) (38) (25) (28) (72) Intersegment sales - Packaging (1) (1) (1) (2) (2) (3) ----------------------------- ---------------------------- Consolidated sales 1,039 1,159 1,267 2,108 2,350 2,503 ----------------------------- ---------------------------- ----------------------------- ---------------------------- Amortization and write-down of property, plant and equipment Papers 51 57 69 104 116 136 Paper Merchants - - 1 1 1 2 Wood 8 9 11 15 17 22 Packaging 8 9 11 15 17 19 ----------------------------- ---------------------------- Total for reportable segments 67 75 92 135 151 179 Corporate 3 3 2 7 7 3 ----------------------------- ---------------------------- Consolidated amortization and write-down of property, plant and equipment 70 78 94 142 158 182 ----------------------------- ---------------------------- ----------------------------- ---------------------------- Operating profit (loss) from continuing operations Papers 15 17 8 (1) (1) 18 Paper Merchants 3 3 4 6 7 9 Wood (9) (10) 11 (13) (15) 17 Packaging 14 16 11 24 27 24 ----------------------------- ---------------------------- Total for reportable segments 23 26 34 16 18 68 Corporate - - 3 2 2 7 ----------------------------- ---------------------------- Consolidated operating profit from continuing operations 23 26 37 18 20 75 ------------------------------------------------------------------------- ------------------------------------------------------------------------- NOTE 11. --------------------- COMPARATIVE FIGURES To conform with the basis of presentation adopted in the current period, certain figures previously reported have been reclassified. DATASOURCE: DOMTAR INC. CONTACT: Christian Tardif, Senior Manager, Corporate and Financial Communications, (514) 848-5515, ; INVESTOR RELATIONS: Pascal Bosse Manager, Investor Relations, (514) 848-5938, ; SOURCE: Daniel Buron, Senior Vice-President and Chief Financial Officer, (514) 848-5234,

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DTC Defence Therapeutics Inc